Friday, April 27, 2007
How Smart is Your Lender? Ask Them What Determines Mortgage Rates!
Many financial experts, mortgage officers and financial writers make the claim that the 10 year Treasury note (10Y T-Bill) is what determines home mortgage rates. If the lender you are working with makes this claim then you need to run away, really fast too. Just as you can’t bet the farm on the price of beans if you are a poultry farmer, you can’t make an intelligent decision on mortgage rates looking at the 10Y T-Bill.
First you need to understand that all mortgages end up being sold in the bond market as Mortgage Backed Securities (MBS). These bonds are traded in the open market in the same fashion as the 10Y T-Bill. When you ask your lender whether you should lock the interest rate or not, like any typical lender she will base her answer on movement of the 10Y T-Bill. If the bond yield is falling, then she will say you can float since tomorrow rates might improve and vice-versa if the yield is rising.
The Mortgage Market Guide, a New York based mortgage industry consulting company, tracked mortgage rate movement against the MBS and 10Y T-Bill. In 21 trading days, they found that these two securities moved in the same direction only 18 times and opposite directions 3 times. Even on the 18 days where they moved in the same direction, the relative change was only close in 6 of the 18 days. So, the two securities behaved closely on only 6 of 21 trading days (28%). If your lender had their eyes on the 10Y T-Bill then you would have missed out-right 3 times and been pretty confused and frustrated the other times.
MBS on the other hand is a direct indicator on how lenders will price their loans. This is because the MBS is what investors in the open market are buying and lenders are selling to finance their loans. The yield on the MBS most accurately reflects mortgage pricing since the value of the bond has a direct bearing on the underlying loans. So, why would you want to base your loan interest rate decision on the 10Y T-Bill? It makes no sense.
I will concede that the 10Y T-Bill and MBS have a similar trend if you look at the monthly data (not the daily data). However, the daily fluctuations are what matters when you are deciding to lock or not lock into an interest rate. In this day and age, there is no reason you shouldn’t have information straight from the horse's mouth especially if you’re the bean farmer!
Posted by Shailesh Ghimire, AZ Mortgage Guru on April 27, 2007 | Permalink
Home buyers are frequently confused about whether to lock in their mortgage interest rate, or let it float and hope interest rates go down. Very interesting and helpful article, Shailesh.
Posted by: Shannon Hubbard | Apr 27, 2007 2:56:47 PM
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